Weekly Market Update Highlights
• High valuations, peak U.S. growth and Delta variant worries will keep equity markets on edge.
• July’s stellar nonfarm payrolls report may be a key input to the Fed’s tapering timeline.
• Global manufacturing PMI remains elevated. In the U.S., manufacturing PMI slowed only modestly in July, and services PMI set a new record high, both supporting our view of still-solid economic growth.
• The 10-year U.S. Treasury yield reversed its recent slide last week, a sign that it may have bottomed, which would bode well for a rebound in cyclicals.
Global equities performed well last week on healthy earnings, upbeat corporate commentary and strong data releases, capped by a big upside surprise in July’s U.S. nonfarm payrolls. Concern about the Delta variant tempered some enthusiasm for the reflation trade. Against this backdrop, gains for the DJIA (+0.8%), S&P 500 (+1.0%) and Nasdaq (+1.1%) were similar. Outside the U.S., emerging markets (+1.2%) benefited from stability in Chinese stocks (+1.8%), which had sold off the week before.
Market Drivers And Risks
• Big beat for July nonfarm payrolls may influence the Fed’s tapering decision. Payrolls had their largest monthly increase since August 2020 with a better-than-expected 943,000 jobs added and upward revisions to prior months.
• The unemployment rate decreased to 5.4% from June’s 5.9% reading. Labor force participation rose to 61.7% and average hourly earnings grew 0.4% (+4.0% year-over-year). Labor market conditions are a key input to the Fed’s tapering decision, though the July report alone is unlikely to significantly shift expectations. While Chair Jerome Powell may drop some hints later this month during his speech in Jackson Hole, an announcement may be more likely in September given uncertainties.
• Decrease in ISM manufacturing PMI may indicate the U.S. has passed peak growth.
• ISM’s July manufacturing PMI marked its 14th consecutive month of expansion, providing a positive signal for both S&P 500 earnings growth estimates and capital expenditures. A record-low reading in the customers’ inventories subindex also fed expectations for an increase in capital spending and an inventory surge. Because July’s PMI was slightly below expectations and less than June’s 60.6 reading, it was interpreted as a minor deceleration in the expansion cycle, or perhaps evidence that U.S. growth is past its peak. The ISM services PMI (64.1) reached an all-time high, although the service sector is not replacing lost jobs at a rate commensurate with its overall expansion.
• Earnings season is just about complete.
• With nearly 90% of S&P 500 companies reporting, earnings grew by nearly 89%, up from estimates of 52% at start of the quarter and 64% at the start of earnings season.
• In aggregate, earnings have come in at 17.1% above expectations, well above the five-year average of 7.8%. Revenue growth increased to 25%, up from 16.5% at the beginning of the quarter and nearly 20% when earnings season began. Prominent themes include strong demand, reopening momentum, supply chain constraints, input price pressures, still-elevated operating leverage and margins, capital return increases and optimism regarding the spread of the Delta variant.
Economic Week In Review
• Ten of the 11 GICS sectors posted gains for the week against a backdrop of broadly strengthening demand and operating leverage. Supply chain constraints and input price pressures remained in focus across industries and sectors. Financials performed best (+3.6%), followed by utilities (+2.3%) and information technology (+1.0%). Only consumer staples (-0.5%) showed a negative return. Small caps (+1.0%) edged large caps (+0.9%), while growth (+0.9%) had a slight advantage over value (+0.8%).